Reference no: EM132972949

On 1 January 2019, Tee Ltd acquired 75% of the share capital of Lee Ltd (cum. Div.) by providing the following considerations:

• Cash paid $100,000.
• Cash of $600,000 is due on 1 January 2020. The incremental borrowing rate for Tee Ltd is 10%.
• The internally generated fair value of the patent was $40,000.
• 55,000 shares were issued at $3.50 per share.
• Due toconcerns about whether the share price will fall below $3.50, Tee Ltd provides a guarantee and pays $1,100.Legal fees, cost of the share issue, and other costs associated with the acquisition were $6,500.

On that date, share capital and reserves, assets,and liabilities of Lee Ltd were as follows:

Share capital $550,000
General reserve $130,000
Retained earnings $155,000

                         Carrying amount ($)            Fair value ($)
Inventory                    130,000                          155,000
Land                            200,000                          230,000

• At the acquisition date, the liabilities of Lee Ltd included a dividend payable of $12,000. All assets of Lee Ltd were recorded at fair value, except for inventory and land. An analysis identifies an unrecorded internally generated trademark considered to have a fair value of $40,000. Lee Ltd is currently being sued by a previous customer. The expected damage with regards to the fair value is $45,000. Lawyers estimate that there is a 15% chance of losing the case. This contingent liability is not included previously in the calculation of liabilities.

• The fair value of a non-controlling interest is $270,000 on 1 January 2019.

(Note: The tax rate is 30% and thefull goodwill method is used).

Required:

Problem 1: Calculate the consideration transferred.

Problem 2: Calculate the fair value of net assets acquired. 

Problem 3: Calculate goodwill or gain on bargain purchase on the acquisition date.

Problem 4: Provide business combination valuation entries and pre-acquisition entries on 1 January 2019.